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Sunday 4 December 2016

ECB under pressure to scrap €500 note - despite German fondness for large bills

Frank Siebelt

Published 17/04/2016 | 02:30

The ECB looks set to stop printing the €500 note, arguing it is used to finance crime
The ECB looks set to stop printing the €500 note, arguing it is used to finance crime

The European Central Bank (ECB) looks set to stop printing the €500 note, arguing it is used to finance crime - although the purple bill will only be phased out gradually due to resistance from Germany, several sources said last week.

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In February, ECB President Mario Draghi said the bank wanted to "make changes" to the €500 note due to fears that it may be used by terrorists and criminals, leading to speculation the banknote may be scrapped.

This prospect triggered a backlash in Germany, where the use of large bills as a means of payment and saving is deeply rooted, leading the ECB to choose a gradual process of withdrawal.

Eurozone central banking sources said the ECB's banknote committee has tabled several options and the most likely scenario is that the €500 banknote will instead simply stop being printed and distributed at cashpoints and bank branches in 2018.

"The most likely outcome is a very gradual phasing out," an ECB insider said.

People would likely be allowed to exchange their banknotes indefinitely, mirroring the policy adopted by Germany's own central bank when the euro replaced the Deutsche Mark in 2002.

A decision is expected at an upcoming non-policy meeting of the ECB's Governing Council and probably as early as May.

The ECB declined to comment.

Even this compromise solution was unlikely to be backed by Germany's central bank, which still fears that any restriction encroaches on citizens' right to cash, one of the sources said.

One Bundesbank director, in fact, disputed that scrapping the note would help tackle terrorism and warned that this could instead see a little bit of "freedom" die. Germany was one of the early champions of the €500 note, which was close in value to the old 1,000 mark note and caters to traditional German preference for cash over electronic money.

The €500 note is worth more than five times the value of the largest US denomination (the $100 bill) and has been dubbed the 'Bin Laden' for its alleged links to terrorism and because of how difficult it is to find. Nearly a third of the €1 trillion circulating last year was stored in €500 notes, ECB data showed. Yet 56pc of EU citizens have never seen one, according to a 2011 ECB survey, because the note is mainly used for hoarding cash, rather than paying for items.

There is no official data about the use of €500 notes by criminals. But studies by EU police agency Europol and the UN Office on Drugs and Crime link it to crime, mostly citing anecdotal evidence.

In 2015, Europol went as far as saying authorities should stop issuing the banknote unless they found evidence it was used legitimately.

"As long as there is a credible allegation that the €500 note is used for illicit activity, the ECB has a moral obligation to act," one of the sources said.

But critics argue that the €500 note serves a legitimate purpose as a store of value, particularly at a time when bank deposits are not remunerated, several lenders are in distress and financial markets are turbulent. By making it more cumbersome to store cash, the ECB decision would indirectly force savers to park some of their cash in banks, and therefore in the financial system, critics say.

They also criticise the loss of privacy stemming from such a switch to electronic payments, which are recorded on banks' databases.

"It's a slippery slope," another source said. "If people got the idea that cash was going to disappear, that would be very dangerous."

©Bloomberg

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